Ferdinand E. Banks, Uppsala University (Sweden), performed his undergraduate studies at Illinois Institute of Technology (electrical engineering) and Roosevelt University (Chicago), graduating with honors in…

Myth and Meaning in the Great World of Energy Economics

Virtually every topic in energy economics contains some elephantine myths that need to be confronted, from oil and gas to Nuclear and renewables.

SOMETHING ABOUT OIL

Take for example oil. The issue is no longer some trivial and useless mathematics, but foolishness of the kind that was once put into circulation by the major oil companies, and is now being launched by OPEC. Having come to appreciate the supreme importance of oil – and how it functions as a benchmark for the world’s energy systems – OPEC has informed the oil importing countries that if the oil price goes up and stays up, then they will invest in more production capacity, and also raise their output of oil. That sounds beautiful – perhaps like something you heard in an introductory economics lecture – only it is completely untrue. It is worse than a myth, because not only is it believed by many academics and their students, but it is accepted by a few influential but not very brainy decision makers as the one and only truth. Although there might be exceptions, the aggregate of OPEC producers have no intention of investing in additional capacity, and they are definitely not going to produce or try to produce much more oil. Why should they? Would you if you were in their place? When the oil price touched $147/b, OPEC set in motion the theory that it was due to speculation (i.e. gambling) and not fundamentals (i.e. supply and demand). This allegation was supported by a finance professional named Michael Masters, who appeared before a sub-committee of the United States Congress, and assured those ladies and gentlemen that it was speculation and not buying and selling on the physical oil market that was ruining the lives of American motorists. A star of Fox News star, Mr Bill O’Reilly, also took a part in this discussion, informing his many admirers that it was “little guys in Las Vegas” who created the problem.If you don’t believe anything else in this exposition, please believe that neither Mr O’Reilly nor the persons he breaks bread with on a daily or annual basis have the slightest idea about the functioning of the world oil market. Isn’t it clear that if the oil price villains had been in Las Vegas, or the financial district of New York, President Bush could have taken the morning train to Wall Street, or jetted to Las Vegas, and using the very great powers of his office, put things right before lunch was served. Instead he climbed into Air Force One and flew to Saudi Arabia, where he asked the Saudi King to produce more oil, and preferably sooner rather than later. That ‘hat-in-hand’ episode was concluded almost immediately after the delivery of the president’s request, with King Abdullah thanking him for his concern, and wishing him a safe trip home. Another person who has not been able to stop manufacturing myths, at least about energy, is Mr Leopardo Maugeri, a director or former director of ENI – perhaps the most important corporation in Italy. Writing in Scientific American (2009), Signor Maugeri has fashioned still another fairy-tale about the abundance of oil, and the unsoundness of wasting precious time and vitality contemplating a hypothetical peaking of the global oil production. I make a point of never paying more than a minimal attention to Mr Maugeri’s ramblings, because many years ago I discovered everything I needed to know about peak oil from my study of oil production in the U.S., and I recommend that you should do the same. Output in that country peaked at the end of l970 at a value of about 9.5 mb/d – which is approximately the present output of Saudi Arabia and Russia, the largest producers of oil in the world. When that peaking took place there was still an enormous amount of oil in the United States, or directly offshore. Production then dropped to 7.5 mb/d, but when the giant Prudhoe Bay field in Alaska came on line, the total output in the U.S. turned up. Unfortunately however, the previous peak was never attained. Instead, total U.S. production stopped short of that peak and once again began to decline. Today U.S. output is approximately 5.5 mb/d, and there is only one way for it to go, which is down. Now take a good look at the production curves for the 300 largest oil fields in the world. If you do you will see that a large majority of these fields have unambiguously turned down (i.e. peaked). Then ask yourself how is it possible, in these circumstances, for anyone to sincerely believe that a global peak will not take place. Since we are talking about myths, please note the word “sincerely”. What it means is that there are people who know better than I do that a global peak will arrive, but have excellent reasons – of a career and financial nature – for claiming the opposite.One of these people is the director of global oil and gas resources at an influential consulting firm, who has employed the picturesque word “garbage” to describe the work of peak-oil believers. If you encounter him some fine day, tell him that the discovery of what we think of as conventional oil peaked in l965. In the early l980s the annual consumption of oil became larger than the annual discovery, and at the present time only about 1 barrel of (conventional or near-conventional) oil is discovered for every 3 consumed. According to a British Petroleum (BP) document, of 54 producing nations only 14 still show increasing production. 30 are past peak output, while output rates are declining in 10. Although I could be wrong, I’ve decided to believe that Mr Maugeri knows at least as much about this subject as I do, although like the above mentioned consultant, and some of my students in Thailand – especially those working for oil firms – he feels that it is in his interest to fabricate and spread myths about the future availability of oil that many people are only too happy to listen to, believe and circulate.

NATURAL GAS AND COAL

Myths that people are happy to listen to, believe and circulate. In the U.S., and to a lesser extent in Europe, that describes natural gas. The reason is that instead of collapsing, as some important scholars once thought, OPEC has become stronger, and since this is now increasingly understood by voters and/or consumers in the energy-intensive countries, more attention is being paid to things like natural gas, nuclear and renewables. At the time of the mini-war in Georgia, several years ago, the American ambassador to Sweden somehow convinced himself that he was an energy expert, and began to run around Europe passing out crank advice on how to deal with the Russian presence in the market for natural gas.This was a problem that I had dealt with earlier, specifically when President Ronald Reagan was attempting – with some success - to keep Europeans from buying gas from the Soviet Union. Thanks to Reagan, at least some of the pipelines to Western Europe from Russian gas deposits may still be under-dimensioned, and as a result the cost of this unnecessary error might eventually total billions of dollars. As for the situation today, the Russians are in an ideal position where supplying gas to Europe is concerned, but it is probably too late for deals to be struck that are optimal for European consumers, thanks to busybodies and amateur economists who believe that confrontation with Russia is preferable to cooperation. For years I have tried to explain that it makes economic sense for the Russians to sell large amounts of natural gas to the Chinese, and now this may be on the verge of happening. Apparently Gazprom has already suggested the construction of two large pipelines from Russia to China that will transmit billions of cubic meters a year, and there are claims that eventually Russia will sell China half the amount they sell Europe. Let’s put this another way. Attempting to mix anti-Russian politics with sensible business arrangements will only succeed in making the commercial relations between Russia and China better than they have been in decades. It is easy to derive a long run scenario where this might benefit Europe and North America, but in the short run it would be better for people like my good self if that gas came to Europe.Moreover, the recent claims about the increase in the availability of natural gas are not easy for me to accept. To be precise, they were so difficult to accept that I started looking for a myth, and this was easy to find. The ostensible enormous increase in the global reserves of natural gas is mostly an increase in unproved and undiscovered – or hypothetical – reserves. Maybe these will be transformed into actual reserves some wonderful day, but maybe not, because as far as I am concerned, one of the main reasons for announcing these spectacular (but controversial) reserve augmentations is to increase share market valuations, as well as to sell some property that might turn out to be worthless, and here I would like to emphasize that I am talking about billions of dollars worth of property, and not just millions. Going a step further, consumers and serious investors are running the risk of being tricked into believing certain things about natural gas that will not serve their countries well in the future. For instance, the occasional talk in the U.S. about energy independence that would be based on huge domestic supplies of gas might be just another example of the kind of showy and dishonest bunkum that the Canadian billionaire investor Stephen Jarislowsky believes to be running wild in the business world.Even so, bunkum is a word that I only very seldom use in my lectures on natural gas, but it almost always finds a place in my lectures on coal. One of the reasons is because regardless of the outcome of the circus that will convene in Copenhagen this December, when would-be experts from every corner of the globe assemble for the purpose of drafting resolutions and possibly a program for improving the world’s environmental health, you can be certain that goofy policies such as cap-and-trade for reducing the output of emissions, or thermodynamic travesties like carbon sequestration, will do absolutely nothing to bring about a palpable reduction in the stock of CO2 in the atmosphere.That might not sound right to some of the colleagues, and so I will make it clearer. Carbon sequestration, or Carbon Capture and Storage (CCS) as it is usually called, is probably one of the most grotesque myths in modern times, and here I always point to the Swedish utility Vattenfall. They are shouting to the high heavens praise for a pilot installation that they have opened in Germany that, in reality, is only about a twentieth of the size of an average modern coal plant. Just as important, it will not be fully evaluated for at least another decade. By that time the man doing the most shouting, Vattenfall’s director, will be retired and dividing his time between a luxury apartment in Germany, and his summer house in some part of the gorgeous Swedish archipelago. One of his successors will therefore have to explain that if this crazy practice is to make environmental sense, it may cost hundreds of billions of dollars in the U.S. alone.The thing to remember here is that about half of the world’s energy is supplied by coal, and many of the politicians who now occasionally strut across the environmental stage could not possibly expect to obtain a renewed mandate if they truthfully informed the electorate of the cost they would have to support if the suppression or storing of only a small amount of the carbon dioxide emissions generated every year became reality. Carbon sequestration is liable to be an important subject in Copenhagen, and I think that the best expression for describing what will be taking place in that wonderful city is a monumental scam or humbug, whose main purpose is to enhance the careers of certain politicians and celebrity environmentalists.

NUCLEAR AND RENEWABLES

The basic issue here is that many persons feel that they have a choice between nuclear and renewables, when in reality they have no choice at all. I am thinking in particular of persons who desire more money as compared to less money, and less work as compared to more work. Also people who want more security, more options concerning leisure and entertainment in their everyday lives, and who hope that the future will feature the kind of communities in which they and their families will have agreeable prospects in regard to incomes and life styles. For me that means communities in which nuclear is allowed to play a suitable, or optimal, or necessary role, although it does not mean a reactor on every street corner. It means innovation and flexibility. Innovation? Flexibility? How can someone look at a nuclear facility and talk about flexibility? The answer is that innovation and flexibility in this context means the ability to greatly improve the technology and economics of future generations of reactors. They can be made safe, and in addition realize higher thermodynamic efficiencies, process more inexpensively what is sometimes called waste, produce larger amounts of heat, etc. I wonder if people like Amory Lovins and Dr. Michael Dittmar were thinking of my position on this subject when they challenged me to on-line debates – challenges which I ignored in the same manner that the king of Saudi Arabia probably ignored President Bush when the subject of increasing the output of oil in his country came up. Moreover, with nuclear installations that are located domestically, you know almost exactly what you will get over very long time frames. With most of the others there are enormous uncertainties about availability and prices.What about renewables? When I gave my course in Australia, that word was strictly used by the cognoscenti. Today everyone uses it, but everyone doesn’t understand its logic. Any program that would be worked out in Copenhagen about renewables would be what Jean-Paul Sartre called ‘a fire without a tomorrow’. It will not be what the governments that sent those travellers to Copenhagen want, or think that they want, although it will generate enough controversy to keep self-appointed environmental experts in places like Sweden busy until the next environmental talk-shop opens for business.

MALTHUS, AND FINALLY ELECTRIC DEREGULATION

A paper that I disliked on an initial reading was ‘The return of Malthus (2008), by Jorgen Orstrom Moller (2008). The reason I disliked it was because I kept focussing on the part where Professor Moller seems to indicate that technology and free market capitalism can save the world from the depletion of non-renewable resources, and the miseries that we would likely suffer in the event of severe over-population. This is the kind of myth that the late Milton Friedman happily presented to Nobel Prize winners in Science and Medicine in Stockholm many years ago, and which they branded as absurd – though unfortunately not to his face, and only after the meeting was concluded. Actually Moller is quite reasonable where this topic is concerned. Like (Reverend) Thomas Malthus, he believes that runaway population growth could result in a very bad scene, and goes so far as to suggest that environmental (i.e. Malthusian) issues “present a challenge to the global commons that neither new territories, technology nor the function of markets alone can solve.” What about adding to those annoyances a shortage of space, pretentious and sub-optimal technological ambitions, malfunctioning markets, declining educational and moral standards, together with a world population of 9 billion souls – which is a likely scenario for 2050 or thereabouts. Some climate woes can also be thrown in, which may or may not be due to human activities.In an article dealing with these matters, David Stipp (2004) noted that perhaps the most realistic study of the political and sociological aspects of this kind of situation is taking place in the U.S. in that very large building called the Pentagon. That being the case, it seems appropriate to cite a particularly relevant observation by Professor Moller. “Mr Malthus is a man that we would not like to meet in person. He is an unwanted guest, one well worth working to avoid.” To which Stipp or one of his readers might add after the cognac had gone around the table a couple of times, ‘ if he cannot be avoided, then he will have to be convinced by fair means or foul to visit other locales.’I began this presentation with my favourite energy economics topic, which just now is oil, and I will close with a subject that was once my favourite, by which I mean electric deregulation. When I passed some of my thoughts on deregulation in California and Sweden to Robert Perri, he told me that he did not have to read them because of what the curse of electric deregulation had meant in Ontario (Canada). By that he specifically meant an escalation in the price of electricity, as well as the removal of a certain political party from the government of that province. I know about the increased price of electricity too, and how much people dislike it, but still I wonder what deregulation craziness is going to be introduced next, and where? Electric deregulation has failed, is failing, or will fail everywhere, but even so I have been informed a few times that I am wrong about deregulation, I miss the point, I’m not aware of this or that or something, I’m too dumb to understand the subtleties of the subject, etc, but on those occasions I generally note what happened in my former home state of Illinois (USA). According to a state official, Kimery E. Vories, the fruits of deregulation in Illinois included electric price increases of forty or fifty percent on a single occasion, lengthy electric outages, and the salaries and bonuses of chief executives increasing by several millions of dollars. The likelihood of bad deregulation news, particularly in California, was something that I had the great pleasure of discussing – ex-ante – in many lectures when I worked in Hong Kong, but as it happened the outcome in California turned out to be much worse than I predicted. In closing I would like to mention – and hope that you do not forget – that if the deregulation of the European gas and electric markets is carried out to the extent desired by the Energy Directorate of the European Union, it could be worse than anything seen in California or Illinois or anywhere else on the face of the earth. The thing to focus on here is that the Energy Directorate of the EU is without the slightest knowledge of either theoretical or applied energy economics, and on the basis of some of the pronouncements coming from that establishment, they are not prepared to take any steps to correct their many inadequacies, although they can hardly fail to be aware of them.

Ferdinand E. Banks

Ferdinand E. Banks, Uppsala University (Sweden), performed his undergraduate studies at Illinois Institute of Technology (electrical engineering) and Roosevelt University (Chicago), graduating with honors in…